CChina has reached a point of no return in its battle to contain what could be the biggest housing collapse the world has ever seen, experts warn, endangering the country’s communist leadership and the global economy.
As Western countries teeter on the brink of a potentially ruinous recession in the coming year, China is also facing recession thanks to the “complete collapse” of confidence among ordinary people in the once-buoyant housing market, the continued of Beijing’s draconian law zero. Covid strategy and an extreme heat wave that is affecting the energy and food supply.
Alarm is spreading in China that tough times are ahead, with Huawei chief executive Ren Zhengfei causing a sensation this week when he warned that the chill of the economic downturn would be “felt by the whole world” for the next decade.
But just as it has become impossible for President Xi Jinping to reverse the massive lockdowns that have stunted economic activity, it also seems increasingly unlikely that he and his politburo will reverse the crackdown on reckless lending in the real estate market that has led to a 40% drop in home sales this year.
The Chinese real estate market has fueled growth for the past two decades and now represents the largest asset class in the world, with a notional value of between $55 trillion (£47 trillion) and $60 trillion, which is larger than the capitalization total US stocks market. Now developers are going out of business after being deprived of easy credit, prices are falling, homeowners are refusing to pay mortgages on unfinished homes, and the slump in property sales and construction is crippling local governments that they depend on land sales for income.
Gabriel Wildau, a China expert at global advisory firm Teneo, says Beijing faces a critical moment over whether to reverse a clampdown on lending or redouble its attempts to “tame the beast” of unproductive construction activity that has resulted. in the rise of ghost towns and airports, as well as roads to nowhere.
“The government faces a difficult choice. But it’s like zero-Covid. They’ve come so far that they can’t go back because then it looks like an error of judgment or policy,” Wildau said.
“This is where the rubber hits the road. They want more high-tech growth and they don’t want as much real estate, but what replaces that? There has been a total collapse of confidence in the real estate market. No industry can survive that.”
Trying to revitalize the economy was the focus of a huge package of measures unveiled by Beijing last week, including 300 billion yuan ($37 billion) in new infrastructure spending and an extension of loans to local governments for value of 500 billion yuan. Economists said the stimulus was expected and may not have much of an impact in an economy already awash in investment funds. What is needed, they say, is for Chinese households to have more cash on hand to rebalance the economy away from the tired old investment model. However, such policies are politically difficult because they threaten the established order of powerful party cadre, centralized state enterprises, and local government junk.
Wildau says Beijing has the money and the technocratic savvy to bail out the real estate sector, but it would be “very expensive.” So far it appears that Xi, despite the chaos unleashed, is sticking to the plan of cutting out the excesses and making sure “houses are for living” rather than speculating.
So far, China’s export industries have held up well, and despite trade wars and lockdowns, the country has increased its share of global manufacturing since the pandemic began. Yet even that is at risk because demand from around the world appears to be falling off a cliff over the next 12 months in a feedback loop that spells more danger for China.
As Ren’s comments on Huawei’s prospects highlighted, it’s not just China that faces uncertainty. Russia’s strangulation of gas supplies and Western sanctions imposed over its invasion of Ukraine are fueling runaway inflation and stalling growth, threatening a bleak winter for developed economies from the United States to Europe and from Japan to Korea. from the south. The worst cost-of-living crisis in almost 50 years is slowly engulfing Western nations and that seems certain to lead to reduced demand for Chinese-made goods as households have to focus on essentials like food and gas. On Friday, US Federal Reserve Chairman Jerome Powell rattled stock markets by saying that households and businesses would suffer as he indicated that the central bank would keep raising rates until inflation expired. .
The drop in external demand is the “next shoe to drop” for China, according to David Llewellyn-Smith, chief strategist at investment and asset management firm Nucelus Wealth in Melbourne, and will leave China in a dangerous state.
“The private sector is being hit by Omicron, the external sector is being hit by global weakness, and the public sector is doing what it can to pick up the slack, but faces several inhibitions in fiscal policy. It is a very toxic combo for China. Very difficult to handle,” he says.
“A Chinese recession is absolutely on the cards over the next year. That will have incredible implications for global markets of all kinds.”
It’s unclear how the world feels the chill Ren has warned about, but it adds an unknown factor to an already dangerous mix of problems, says Roland Rajah, a senior economist at the Lowy Institute, a think tank in Australia. These include: increasing geopolitical volatility; fragile supply chains; political dysfunction in the US; digital disruption; and the accelerating effects of climate change. The challenges even prompted French President Emmanuel Macron to join the gloomy forecasts in saying we are seeing the “end of plenty.”
In the global financial crisis of 2008-09, China came to the rescue of the world economy with a 4 trillion yuan stimulus. But with Beijing in the process of disengaging from the Western-led world order and debt-driven growth in disuse, another Chinese rescue mission seems highly unlikely. Instead, China faces Japan-style “lost decades” as it tries to absorb billions of dollars of bad real estate loans.
“In the short term, China’s economy is taking a hit,” says Rajah. “It remains to be seen what the consequences might be in the medium and long term. But China also faces very significant long-term headwinds from demographic decline and ageing, creeping statism, and its increasingly difficult foreign relations.”
And as China reaches its tipping point in its housing crisis, the world economy itself is also at a crossroads. “The world economy appears to be at a tipping point,” says Rajah, “although it is still in a state of flux where things could still go either way. People have to prepare for a much more uncertain world, but we must also expect much more from our politicians and legislators, because the need for smart policy is ever greater.”